“The
complexity and gravity of the present economic situation rightly cause us
concern,
but
we must adopt a realistic attitude as we take up with confidence and hope the
new
responsibilities
to which we are called by the prospect of a world in need of profound
cultural
renewal, a world that needs to rediscover fundamental values on which to
build
a better future. The current crisis obliges us to re-plan our journey, to set
ourselves
new rules and to discover new forms of commitment, to build on positive
experiences
and to reject negative ones. The crisis thus becomes an opportunity for
discernment,
in which to shape a new vision for the future. In this spirit, with confidence rather
than resignation, it is appropriate to address the difficulties of the present
time.”
Pope Benedict XVI, Charity in Truth
"Let’s
not pretend that things will change if we keep doing the same things. A crisis
can
be
a real blessing to any person, to any nation. For all crises bring progress. Creativity
is born from anguish, just like the day is born from the dark night. It’s in
crisis that
invention is born, as well as discoveries, and major strategies. Whoever overcomes crisis,
overcomes himself, without getting overcome. Whoever blames his failure on a crisis
neglects his own talent, and is more concerned with problems than with
solutions. There’s
no challenge without a crisis. Without challenges, life becomes a routine, a
slow agony.
There’s no merit without crisis. It’s in the crisis that we can show the very
best in us.
Without a crisis, any wind becomes a tender touch. To speak about a crisis is
to promote
it. Not to speak about it is to exalt conformism. Let us work hard instead. Let
us stop, once and for all, the menacing crisis that represents the tragedy of
not being
willing to overcome it. “
Albert Einstein
Economic models based on the “homo oeconomicus,” or other
axiomatic approaches, are misleading
As
revealed in many financial crises in the last decades, including the most
recent one, the concept of the “homo oeconomicus” is inadequate and the
economic models based on this concept are misleading. This concept is based on
the widespread idea (that is now changing among many economists) that, when
acting in the economic sphere, the person is intrinsically egotistical (first
unreasonable concept), always behaves in a rational way (second unreasonable
concept), and looks exclusively for profit maximization (third unreasonable concept). On the basis of these
unreasonable premises, a theory developed that mere individual interest would
be sufficient to build a collective economic order: an “invisible hand,” the
market, would magically create a balanced system. Reality, however, has shown
that this axiomatic approach, especially when human freedom is at play as it is
in economics, does not work and causes large-scale damage. As many economists
are attesting, the creation of an economic model has to be based on the
observation of reality rather
than on axioms. Furthermore, its application cannot be left in the hands of a
machine but always requires a critical eye, a good dose of realism, and certain
caution.
August 6, 2007: American Home Mortgage Investment Corporation files for bankruptcy protection. The crisis extends from the U.S. to the world, because of the global market of the securitized subprime mortgages.
March
24, 2008: Bear Sterns, on the verge of bankruptcy, is purchased by JP Morgan
thanks to an extraordinary term financing provided by the Federal Reserve Bank
of New York.
September
7, 2008: The U.S. Federal Government takes control of Fanny Mae and Freddie Mac
to avoid their collapse.
September
15, 2008: Lehman Brothers, one of the five most important merchant
banks in the world, goes bankrupt.
September
16, 2008: The U.S. Government, through the Federal Reserve Bank of New York,
rescues AIG (the biggest U.S. insurance company) from bankruptcy by lending $85
billion.
September
26, 2008: After the U.S. Congress refuses to approve the Treasury Department’s
plan to face the financial crisis, stock exchanges around the world go
into panic and the liquidity crisis quickly hits Europe and Asia.
September
30, 2008: The entire financial and credit system in the world is
paralyzed. The central banks of the most important countries in the world put
enormous amounts of liquidity into the markets.
October
14, 2008: TARP (Troubled Assets Relief Program) is approved: the U.S.
Government makes available to the banking system $700 billion to eliminate the
“toxic” assets.
December
11, 2008: 4.4 million people are without jobs in the U.S., the highest number
since 1982.
February
17, 2009: The “American Recovery and Reinvestment Act of 2009” (also known as
the “Tax Stimulus Program”) is approved with tax cuts and other incentives for
$820 billion.
March
19, 2009: The U.S. Treasury Department announces an “Auto Supplier Support
Program” that will provide $5 billion in financing to the automotive industry.
June
2010: The Greek crisis explodes. Other European countries, like Portugal and
Ireland, are in serious financial trouble.
January
2011: Although the crisis is technically over, the unemployment rate in the
U.S. remains very high (9.8%) and the future full of uncertainties.
Why did it happen? The dynamic of the crisis
Even though there are scores of differing
analyses, there is a general consensus among the experts that the crisis was
unleashed by the severe decrease in value of the real estate market. This
decrease in value caused the conditions for a “perfect storm” for the economy
with the exponential escalation of the following effects:
Inability
to refinance the terms of mortgages and above all the very popular (now
infamous) subprime mortgages (i.e., mortgages given to people with insufficient
funds for down payments, poor or no credit history, and/or low incomes). The
increase in value of homes was the only possibility for borrowers to refinance
the terms of mortgages (and decrease the otherwise progressively higher
mortgage payments) and the main guarantee for lenders. Increase in defaults of
mortgage payments and foreclosures, and consequent losses for the financial
institutions lending the funds. Drastic depreciation of trillions of dollars of
“mortgage-backed securities” (i.e., securities that represent slices of
mortgages) owned by the leading financial institutions all around the world
(the so-called “toxic assets”). The impracticality of establishing values for
the illiquid mortgage-backed securities owned by the banks and, therefore, the
impossibility of ascribing value to the potential losses in their financial
statements. Generalized loss of trust in the capacity of borrowers (banks,
businesses, and individuals, no matter how solid they may have appeared) to
repay their debts and, as a consequence, dramatic decrease in investments.
Slowing down and sometime-paralysis of the credit mechanism for businesses and
between financial institutions, with consequent economic down-turn and
unemployment increases.
LESSONS
HIDDEN WITHIN THE CRISIS
No scapegoats but a shared responsibility
There
is no shortage of explanations for the crisis. All the possible causes and
mistakes have been scrutinized by a multitude of experts. But it would be
incorrect to point the finger at a single category of people or
institutions. There are no scapegoats because everyone shares the
responsibility of ignoring the suggestions given by reality: the consumers
seeking to live way above their financial means; the financial
companies
and the credit rating agencies earning easy money; the government, the public
institutions, and the regulators facilitating this process. But, at a certain
point, reality struck back and now it invites us to learn certain lessons. What
are they?
Economic models based on the “homo oeconomicus,”
or otheraxiomatic approaches, are misleading
As
revealed in many financial crises in the last decades, including the most
recent one, the concept of the “homo oeconomicus” is inadequate and the
economic models based on this concept are misleading. This concept is based on
the widespread idea (that is now changing among many economists) that, when
acting in the economic sphere, the person is intrinsically egotistical (first
unreasonable concept), always behaves in a rational way (second unreasonable
concept), and looks exclusively for profit maximization (third
unreasonable concept). On the basis of these unreasonable premises, a theory
developed that mere individual interest would be sufficient to build a
collective economic order: an “invisible hand,” the market, would magically
create a balanced system.
Reality,
however, has shown that this axiomatic approach, especially when human freedom
is at play as it is in economics, does not work and causes large-scale damage.
As many economists are attesting, the creation of an economic model has to be
based on the observation of reality rather than on axioms. Furthermore, its
application cannot be left in the hands of a machine but always requires a
critical eye, a good dose
of
realism, and certain caution.
Pure individualism, short-term proit, and competition à la Darwin, are inadequate
The
exaltation of an abstract idea of individualism. “The conviction that man is
self-sufficient and can successfully eliminate the evil present in history by
his own action alone has led him to confuse happiness and salvation with
immanent forms of material prosperity and social action. Then, the conviction
that
the
economy must be autonomous, that it must be shielded from “influences”
of a moral character, has led man to abuse the economic process in a thoroughly
destructive way.”
Pope Benedict XVI, Charity in Truth
The
exaltation of short-term proit as the only goal of a business. The
pursuit of short-term proit tends to force reality (in order to
obtain results at all costs), and facilitates unrealistic and unethical
behaviors in the workplace.
The unreasonable idea that the person looks
exclusively for profit-maximization is also at the origin of several other
misconceptions: The exaltation of an abstract,
Darwinian, idea of competition. According to this idea, the other businesses
are seen as enemies to eliminate or to exploit. The increasing need to pool
resources, strategies, and research and development activities, even with
competitors, to better face the challenges of a global
market,
is often ignored.
C
A
Technology is not sufficient
“Technological
development can give rise to the idea that technology is self-suficient
when too much attention is given to the ‘how’ questions, and not enough to the
many ‘why’ questions underlying human activity. True development does not
consist primarily in ‘doing.’ The key to development is a mind capable of
thinking in technological terms and grasping the fully human meaning of human
activities, within the context of the holistic meaning of the individual's
being. Even when we work through satellites or through remote electronic
impulses, our actions always remain human, an expression of our responsible
freedom. Technology is highly attractive because it draws us out of our
physical limitations and broadens our horizon. But human freedom is authentic
only when it responds to the fascination of technology with decisions that are
the fruit of moral responsibility. Hence the pressing need for formation in an
ethically responsible use of technology. Moving beyond the fascination that
technology exerts, we must reappropriate the true meaning of freedom, which is
not intoxication with total autonomy, but a response to the call of being,
beginning with our own personal being.”
Pope Benedict XVI, Charity in Truth
Finance is not alchemy
Finance
has been gradually considered more and more as a generator of prosperity
without being related to any value and to real economy. Financial activities,
at the service of entrepreneurial spirit, have become an end in themselves and
finance, with its increasingly sophisticated and intricate products, began to
live in a parallel, self-referential, universe. In the illusion of generating
unlimited wealth, the players acting in this universe ignored the most obvious
signals to their common sense to try to overcome limitations imposed by
reality.
WHAT CAN MOVE US BEYOND THE CRISIS
Economic growth: the only way out
No
short-cuts, financial tricks, or magic solutions (from the public or private
sector) will solve the economic problems we are still facing. Only real and
sustainable economic growth with its longer-term drivers, i.e., labor force and
productivity, will move us beyond the crisis. However, no mix of government
policy and private sector incentives can replace a deeper cultural question
about the relationship between human desire and work. And no financial engineering, labor market policies, and other government regulations—while
certainly having an impact—can substitute the role of education in underlying
longer term productivity growth. Human beings are not ants, and economic
construction is not a mechanical process, but a truly human
event which involves reason and freedom at every step. At the center of
economic action lies a free, relational subject moved by the desire to
transform reality to reach his or her own fulfillment.
The need to reassess the foundations of work,
business, and finance
As
Pope Benedict XVI suggests in Charity in Truth:
“The current crisis obliges us to re-plan our journey … The crisis thus becomes
an opportunity for discernment, in which to shape a new vision for the future.”
A new vision in economy implies the reassessment of the constitutive factors of
its growth: the person and his/her own desire; work and its driving forces;
businesses and their organizations; finance and its
goals.
Only after such a reassessment can new models and a new set of rules and
regulations be established, if they are necessary.
Desire: the essence of human nature and the
engine that moves everything
Reassessing
what can move us beyond the crisis is the same as reassessing what moves us at
the start of every day. In order to begin anew, we can only start from what
drives a person to face life and work. There are many theories about what
motivates people to work but, at their roots, lies a compelling force: the
desire to achieve happiness and to make it complete and lasting. This desire
for fullness of life is the essence of human nature. Not only does it set us in
motion to search for the infinite and ultimate meaning of life, but it also
pushes us to work, in order to transform reality to make it more suited to the
ultimate demands inscribed in our nature. Contrary to certain socio-economic
literature, the attitude toward work is directly
correlated
to the extent with which one lives his/her deep nature, which is desire for
justice, truth, and beauty.
The need for support vs. the mystique of the
self-made man
In
as much as desire is the essence of human nature, in the same way,
existentially, it is betrayed by censuring, denying, suffocating, or reducing
the depth and breadth of the longing for fulfillment. Such betrayal,
which starts in ourselves, is also favored by everything outside of us that
tends to systematically tame one’s desires, to the point of creating—as Luigi
Giussani stated—“bewilderment in young people and cynicism in adults.” The
person, left alone, is not able to live up to the stature of his/her own
humanity. This is why the image of the self-made man as the ideal entrepreneur
is, in real life, utopian. How, instead, can this stature be continually
rescued? Once again, the answer comes from human nature. Pope Benedict XVI in Charity in Truth defines the person as a relational being, made in the
image of the Trinity: “The development of peoples depends mostly upon the
recognition of being one family that collaborates in true communion and is
constituted by subjects who don’t simply live one next to the other. … The
human creature, since it has a spiritual nature, fulfills itself in
interpersonal relationships. The more the person lives them authentically, the
more the person matures.”
The
notion of human nature as desire for fulfillment is the foundation for a new
and truer concept of work. Work is the “connection between the action, be it
extraordinary or banal, and the ultimate fulfillment of life, its ultimate
destination, its ultimate meaning” (Julián Carrón). This connection, and the
continuous desire to discover it, is what gives freedom, dignity, balance, true
value, sense of accomplishment, gusto, and satisfaction to our work, more than
any other job condition or level of compensation. The awareness of this
connection is called, in Christian terms, offering: the recognition that one’s
actions belong to a greater design that has a meaning. Any theory about work
that forgets the essence of our humanity as longing for an everlasting
happiness and reduces freedom to mechanics is misleading and destined to be
unsuccessful.
A new concept of work as the connection between
one’s actions and the
ultimate fulfillment
The
concept of human nature as desire and of work as a connection to a greater
design is the foundation of a more realistic concept of business. A business,
regardless of size, is a set of individuals and resources whose primary goal is
not merely to pursue profit, but also to create jobs and to provide
top-quality goods and services. Actually, profit, far from becoming a
goal in itself, becomes the test of how well the business is pursuing its other
goals (which, from a personal and social point of view, are more relevant than
profit). In this way, the business becomes a place where the
entrepreneurial spirit is constantly regenerated by encouraging the creativity
of the employees and the use of all the resources at hand. Sharing, dialoguing,
and comparing its own endeavors with others businesses is not regarded with
suspicion. The risk-taking activity is not disjointed by the sense of
responsibility toward the people who participate in the enterprise. No factors
both within and outside the business (employees, clients, consumers, the
environment, and society as a whole) are overlooked. Only a business conceived
in this way can live up to the ideals of what today is called “corporate
responsibility.”
A new concept of business and corporate
responsibility
A
notable consequence of this concept of business is that the employee is no
longer
considered
solely as an instrument to increase profit. Studies and common
experience
show
that personal motivation and love for the job are the most important elements
for
positive work performances. However, the employee cannot be deliberately
manipulated
as
an instrument to this end - only a relationship of “partnership” is,
ultimately,
appropriate.
A person who is free, mature, and reliable in everyday life is the best thing
that
can happen to a business.
The employer/employee relationship as partnership
What
is true for the individual is true for businesses. A business, left alone, is
not able to live up to its mission and needs support. For this reason, free
associations among businesses, networks of cooperation and mutual help, pooling
of tools and resources, sharing of research and development activities, are
positive factors which contribute to the creation of a flourishing economic
environment. Any theory that promotes, instead, the idea of the business world
as a jungle where each one is on his/her own and everybody else is a potential
enemy is as damaging as it is depressing.
The relevance of cooperation among businesses
Real
economic growth, centered on the person as desire, work as connected to a
greater design, and business as not merely profit-seeking, implies the
enhancement of human capital, organizational flexibility (with direct,
frequent, and informal interpersonal exchanges between businesses), production
flexibility (which offers personalized products and quickly adapts supply to
demand), close connection with the local socio-economic environment (which
implies being in close contact with customers), and investment in research and
development to guarantee the stability of the business through time.
Some implications of a new concept of work and
business
The
financial sector plays an essential role in the development of economic growth.
The current crisis is not a problem of too much or too little finance. The
financial sector should not ignore its ultimate purpose and point of reference,
which is service to the real economy. And those who work in the financial
sector, like everybody else, need to look for a meaning in their jobs that goes
beyond a limited measure of success to include the entire reality of work and
what it reveals about themselves and their destiny.
Finance at the service of real economy
A new vision for the future and the need for
education
No
crisis is able to halt the personal and social journey of life, because no
difficulty is stronger than the unquenchable longing that marks our human
questions and pushes us to start again, every morning, every time. By
re-echoing the sentiments in our own hearts, the Pope has invited us to shape a
new vision for the future in order to move beyond the crisis. What is needed to
accept this invitation is an education to become familiar with our own
humanity. And by education we mean an introduction to the reality of what
constitutes the core of our own self, led by a teacher and supported by
examples. This education to live our own human questions with seriousness is
much more comprehensive and relevant to the creation of entrepreneurial spirit,
job opportunities, and wealth, than schooling, ethical principles applied to
the economy, or even profit itself.
“Desire
is like the spark with which an engine gets started. Every human action is born
from this phenomenon, from this dynamism which constitutes man. It’s desire
that turns on ‘man’s engine.’ As a consequence, he starts looking for bread and
water, for work, for a woman; he looks for a more comfortable armchair and a
better house. He starts getting interested in the fact that some people have
more than others, he looks at the fact that some people are treated in a
certain way and he’s not, precisely because of the increase of these stimuli he
has within himself and that the Bible calls heart.”
Msgr. Luigi Giussani
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